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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 12, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.
Commission File Number: 33-41791
SPARTAN STORES, INC.
(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN 38-0593940
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
850 76TH STREET, S.W.
P.O. BOX 8700
GRAND RAPIDS, MICHIGAN 49518
(Address of Principal Executive Offices) (Zip Code)
(616) 878-2000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes _X_ No ___
As of October 10, 1998, the issuer had 11,092,918 outstanding shares of
Class A Common Stock, $2 par value.
_____________________
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SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 12,
1998 MARCH 28,
(UNAUDITED) 1998
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 34,304,049 $ 37,026,640
Marketable securities 20,345,381 18,333,323
Accounts receivable 74,601,504 74,549,520
Inventories 81,210,351 92,706,414
Prepaid expenses 5,830,644 6,885,828
Deferred taxes on income 7,094,000 7,277,000
------------ ------------
TOTAL CURRENT ASSETS 223,385,929 236,778,725
NOTES RECEIVABLE 4,362,570 6,539,412
OTHER ASSETS 1,580,922 1,703,110
PROPERTY AND EQUIPMENT
Land and improvements 33,038,112 33,098,220
Buildings 136,171,842 136,496,867
Equipment 138,258,037 138,663,310
------------ ------------
307,467,991 308,258,397
Less accumulated depreciation and amortization 151,443,857 147,146,529
------------ ------------
NET PROPERTY AND EQUIPMENT 156,024,134 161,111,868
------------ ------------
TOTAL ASSETS $385,353,555 $406,133,115
============ ============
-2-
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 5,000,000 $ 38,500,000
Accounts payable 100,067,583 81,690,574
Accrued payroll and benefits 13,345,117 13,447,559
Insurance reserves 15,469,406 15,799,160
Other accrued expenses 23,178,018 19,759,049
Current maturities of long-term debt and capital
lease obligation 6,526,403 6,544,777
------------ ------------
TOTAL CURRENT LIABILITIES 163,586,527 175,741,119
DEFERRED TAXES ON INCOME 3,809,500 3,750,000
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 4,934,200 4,784,200
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION 91,800,248 107,665,545
SHAREHOLDERS' EQUITY
Class A common stock, voting, par value
$2 a share; authorized 20,000,000 shares;
outstanding 11,270,925 and 11,443,985 shares 22,541,850 22,887,970
Additional paid-in capital 16,035,985 16,431,937
Retained earnings 82,645,245 74,872,344
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 121,223,080 114,192,251
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $385,353,555 $406,133,115
============ ============
-3-
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
SECOND QUARTER (12 WEEKS) ENDED
-------------------------------
SEPTEMBER 12, SEPTEMBER 13,
1998 1997
(UNAUDITED) (UNAUDITED)
------------ ------------
NET SALES $617,700,161 $587,639,552
COSTS AND EXPENSES
Cost of sales 556,750,189 528,917,683
Operating and administrative 52,857,028 53,585,954
Interest expense 1,990,368 2,439,349
Interest income (770,550) (670,780)
Loss (gain) on sale of property and equipment 729,404 (1,158,638)
------------ ------------
TOTAL COSTS AND EXPENSES 611,556,439 583,113,568
------------ ------------
EARNINGS BEFORE INCOME TAXES 6,143,722 4,525,984
INCOME TAXES 2,003,000 1,688,000
------------ ------------
NET EARNINGS $ 4,140,722 $ 2,837,984
============ ============
BASIC AND DILUTED NET EARNINGS PER
CLASS A SHARE $ 0.36 $ 0.24
============ ============
BASIC WEIGHTED AVERAGE CLASS A SHARES 11,387,143 11,856,374
============ ============
DILUTED WEIGHTED AVERAGE CLASS A SHARES 11,391,582 11,859,268
============ ============
DIVIDENDS DECLARED PER CLASS A SHARES $ 0.0125 $ 0.0125
============ ============
-4-
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR TO DATE (24 WEEKS) ENDED
----------------------------------
SEPTEMBER 12, SEPTEMBER 13,
1998 1997
(UNAUDITED) (UNAUDITED)
-------------- --------------
NET SALES $1,203,524,166 $1,153,378,491
COSTS AND EXPENSES
Cost of sales 1,082,154,279 1,038,050,206
Operating and administrative 105,164,462 105,281,014
Interest expense 4,039,818 4,745,848
Interest income (1,329,272) (1,417,622)
Gain on sale of property and equipment (1,188,206) (2,100,328)
-------------- --------------
TOTAL COSTS AND EXPENSES 1,188,841,081 1,144,559,118
-------------- --------------
EARNINGS BEFORE INCOME TAXES 14,683,085 8,819,373
INCOME TAXES 5,240,000 3,175,000
-------------- --------------
NET EARNINGS $ 9,443,085 $ 5,644,373
============== ==============
BASIC AND DILUTED NET EARNINGS PER
CLASS A SHARE $ 0.83 $ 0.47
============== ==============
BASIC WEIGHTED AVERAGE CLASS A SHARES 11,423,372 11,952,729
============== ==============
DILUTED WEIGHTED AVERAGE CLASS A SHARES 11,427,811 11,955,623
============== ==============
DIVIDENDS DECLARED PER CLASS A SHARES $ 0.0250 $ 0.0250
============== ==============
-5-
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CLASS A ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
----------- ----------- -----------
BALANCE - MARCH 29, 1997 24,065,700 18,406,969 64,784,905
CLASS A COMMON STOCK TRANSACTIONS
895,256 shares purchased (1,790,512) (4,769,484) (3,559,471)
306,391 shares issued 612,782 2,794,452
NET EARNINGS 14,233,981
CASH DIVIDENDS - $.05 PER SHARE (587,071)
----------- ----------- -----------
BALANCE - MARCH 28, 1998 $22,887,970 $16,431,937 $74,872,344
CLASS A COMMON STOCK TRANSACTIONS
299,653 shares purchased (599,306) (1,645,428) (1,385,994)
126,593 shares issued 253,186 1,249,476
NET EARNINGS 9,443,085
CASH DIVIDENDS - $.025 PER SHARE (284,190)
----------- ----------- -----------
BALANCE - SEPTEMBER 12, 1998 $22,541,850 $16,035,985 $82,645,245
=========== =========== ===========
-6-
SPARTAN STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR TO DATE (24 WEEKS) ENDED
---------------------------------
SEPTEMBER 12, SEPTEMBER 13,
1998 1997
(UNAUDITED) (UNAUDITED)
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 9,443,085 $ 5,644,373
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 9,353,170 9,821,727
Postretirement benefits other than pensions 150,000 110,000
Deferred taxes on income 242,500 166,000
Gain on sale of property and equipment (1,188,206) (2,100,328)
Change in assets and liabilities:
Marketable securities (2,012,058) 2,520,264
Accounts receivable (51,984) 1,246,093
Inventories 11,496,063 (12,314,378)
Prepaid expenses 1,055,184 (1,145,882)
Accounts payable 18,377,009 16,987,188
Accrued payroll and benefits (102,442) (2,159,513)
Insurance reserves (329,754) 916,153
Other accrued expenses 3,418,969 (3,386,846)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 49,851,536 16,304,851
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (6,932,977) (15,226,451)
Proceeds from the sale of property and equipment 3,855,747 9,147,629
Other 2,299,030 (310,213)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (778,200) (6,389,035)
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in notes payable (33,500,000) (9,000,000)
Proceeds from long-term borrowings 2,708,077 18,649,130
Repayment of long-term debt and capital lease (18,591,748) (15,897,716)
Proceeds from sale of common stock 1,502,662 1,661,848
Common stock purchased (3,630,728) (4,126,173)
Dividends paid (284,190) (298,424)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (51,795,927) (9,011,335)
----------- -----------
-7-
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,722,591) 904,481
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 37,026,640 34,198,752
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF SECOND QUARTER $34,304,049 $35,103,233
=========== ===========
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES
The 1998 Annual Report on Form 10-K contains a summary of significant
accounting policies in the notes to consolidated financial statements. The
Company follows the same accounting policies in the preparation of interim
financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the March 28, 1998 presentation
in order to conform to the September 12, 1998 presentation.
STATEMENT OF REGISTRANT
The data presented herein is unaudited, but in the opinion of management
includes all adjustments (which consist solely of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
position of the Company and its subsidiaries at September 12, 1998 and the
results of their operations and the changes in cash flows for the periods
ended September 12, 1998 and September 13, 1997. These interim results are
not necessarily indicative of the results of the fiscal years as a whole.
CONTINGENCIES
On August 21, 1996, the Attorney General for the State of Michigan filed
an action in Michigan circuit court against the leading cigarette
manufacturers operating in the United States, twelve wholesalers and
distributors of tobacco products in Michigan (including three Company
subsidiaries) and others seeking certain injunctive relief, the
reimbursement of $4 billion in Medicaid and other expenditures incurred or
to be incurred by the State of Michigan to treat diseases allegedly caused
by cigarette smoking and punitive damages of $10 billion. In July 1998,
the court dismissed the claim for punitive damages. During fiscal
year 1998, three actions were filed in state courts in Tennessee and
twenty-two actions were filed in state courts in Pennsylvania against the
leading cigarette manufacturers operating in the United States and certain
wholesalers and distributors, including a subsidiary of the Company. In the
three Tennessee actions, one action was filed as a class action on behalf
of the individual plaintiffs, one action was filed on behalf of the State
of Tennessee and its taxpayers, and one action was filed by an individual
plaintiff. All of the Pennsylvania actions were filed by individual
plaintiffs. In these separate cases, the plaintiffs are seeking
compensatory, punitive and other damages, reimbursement of medical and
other expenditures and equitable relief. The Company believes that its
subsidiaries have valid defenses to these legal actions. These actions
-9-
are being vigorously defended. The three Tennessee actions have been
dismissed. All but one of the Pennsylvania actions have been dismissed
without prejudice pursuant to a Dismissal and Tolling Agreement under which
the defendants have agreed not to raise the defense of statute of
limitations or laches if an action is filed by a plaintiff before April 1,
1999. One of the cigarette manufacturers named as a defendant in each
action has agreed to indemnify the Company's subsidiaries from damages
arising out of these actions. Management believes that the ultimate
outcome of these actions should not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company.
Various other lawsuits and claims, arising in the ordinary course of
business, are pending or have been asserted against the Company. While
the ultimate effect of such actions cannot be predicted with certainty,
management believes that their outcome will not result in a material
adverse effect on the consolidated financial position, operating results
or liquidity of the Company.
SUBSEQUENT EVENT
On October 14, 1998, the Company's Board of Directors approved an
initiative to negotiate an agreement with a distribution and logistics
management company to build, own and operate a new multi-commodity
distribution center for the Company and its subsidiaries. The initiative
includes the cessation of operations at the Company's existing distribution
center in Plymouth, Michigan by April 2000 and would result in the
displacement of approximately 300 associates in Plymouth and approximately
100 associates at its Grand Rapids distribution center. Management expects
this initiative to have a positive impact on operating and administrative
expenses as a percentage of net sales although its evaluation of the total
associated costs has yet to be completed.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth items from the Company's Consolidated
Statements of Earnings as percentages of net sales:
SECOND QUARTER (12 WEEKS) ENDED YEAR TO DATE (24 WEEKS) ENDED
------------------------------- -----------------------------
SEPTEMBER 12, SEPTEMBER 13, SEPTEMBER 12, SEPTEMBER 13,
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net Sales 100.0% 100.0% 100.0% 100.0%
Gross profit 9.9 10.0 10.1 10.0
Less:
Operating and administrative expenses 8.6 9.1 8.8 9.1
Interest expense .3 .4 .3 .4
Interest income (.1) (.1) (.1) (.1)
Loss (gain) on sale of property
and equipment .1 (.2) (.1) (.2)
----- ----- ----- -----
TOTAL 8.9 9.2 8.9 9.2
----- ----- ----- -----
EARNINGS BEFORE INCOME TAXES 1.0 .8 1.2 .8
Income taxes .3 .3 .4 .3
----- ----- ----- -----
NET EARNINGS .7% .5% .8% .5%
===== ===== ===== =====
NET SALES
The following table sets forth the Company's net sales (in millions) by
segment for the quarter and year to date ended September 12, 1998:
-11-
SECOND QUARTER (12 WEEKS) ENDED YEAR TO DATE (24 WEEKS) ENDED
------------------------------- -----------------------------
SEPTEMBER 12, SEPTEMBER 13, SEPTEMBER 12, SEPTEMBER 13,
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Distribution:
Grocery store $412.7 $414.5 $ 810.4 $ 813.9
Convenience store 198.5 166.0 379.7 325.4
Insurance 3.9 4.1 8.0 8.0
Real estate and finance 2.6 3.0 5.4 6.1
------ ------ -------- --------
TOTAL $617.7 $587.6 $1,203.5 $1,153.4
====== ====== ======== ========
Net sales for the quarter and year to date ended September 12, 1998
increased $30.1 million and $50.1 million, respectively, compared to the
comparable periods in the prior year.
Sales to grocery store retailers for the quarter and year to date ended
September 12, 1998 declined $1.8 million and $3.5 million, respectively,
compared to the comparable periods in the prior year due primarily to
competitive market conditions and timing of promotional activities. The
Company has experienced declines in sales of grocery and general
merchandise products as well as retail store equipment. However, offsetting
these declines to a significant degree are sales of pharmacy and perishable
products. In an effort to remain competitive with competing formats, the
Company is focusing its promotional efforts on higher priced items and has
committed a portion of earnings to the development of promotional programs
in conjunction with food manufacturers. Additionally, the Company recently
announced its intention to enter the retail industry through acquisition to
assist in maintaining and increasing sales volumes.
Sales to convenience store retailers for the quarter and year to date ended
September 12, 1998 increased $32.5 million and $54.3 million, respectively,
compared to the comparable periods in the prior year. The increases are
due primarily to rising cigarette prices and good weather which has a
positive impact on convenience store purchases. The Company has
experienced six cigarette price increases since March 1997 that aggregate
approximately 12%. Also having a positive impact on sales to convenience
store retailers is the addition of new customers late in the third quarter
of the prior year.
-12-
Sales in the Insurance segment were comparable with prior periods.
Sales in the Real Estate and Finance segment for the quarter and year to
date ended September 12, 1998 declined $.4 million and $.7 million,
respectively, compared to the comparable periods in the prior year. The
declines are due primarily to a reduction in rental income resulting from
management's plan to reduce the Company's real estate portfolio. Seven
retail properties have been sold since September 1997.
GROSS PROFIT
Gross profit as a percentage of net sales for the quarter ended September
12, 1998 was 9.9% compared to 10.0% for the quarter ended September 13,
1997. The decline in gross profit percentage is due primarily to
increasing cigarette sales, for which the gross profit percentage is
significantly less than for groceries and related products.
The negative impact of increasing cigarette sales on gross profit as a
percentage of net sales was offset by significant improvements in gross
profits on sales of groceries and related products to grocery store
retailers. The Company has enhanced existing inventory procurement
practices by purchasing inventories in excess of current needs to take
advantage of promotions offered by vendors. The Company's revised
methodology for computing cost-plus fees also improved gross profits.
Finally, gross profits on these sales are being positively impacted by a
changing sales mix. Declining sales of groceries were offset by increased
sales of perishable products, which have higher margins, and to a lesser
extent sales of pharmacy products, which have lower margins.
Gross profit as a percentage of net sales for the year to date period ended
September 12, 1998 was 10.1% compared to 10.0% for the year to date period
ended September 13, 1997. The increase on a year to date basis was due to
the fact that rising cigarette prices had less of an impact over the 24
week period compared to the 12 week period.
Gross profit as a percentage of net sales for the quarter and year to date
periods ended September 12, 1998 in the insurance and real estate and
finance segments were comparable with prior periods.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses as a percentage of net sales for the
quarter and year to date ended September 12, 1998 were 8.6% and 8.8%,
respectively, compared to 9.1% for the quarter and year to date ended
September 13, 1997.
The reduction in operating and administrative expenses as a percentage of
net sales is primarily the result of the increase in net sales as discussed
-13-
above, although the increase in net sales had less of an impact over the 24
week period compared to the 12 week period. In addition, actual operating
and administrative expenses have also declined. Cost reduction continues to
be a Company wide initiative in order to position the Company competitively
as a low cost supplier.
Compensation associated with the Company's collective bargaining labor
force continues to be higher than the prior year. The discontinuance of
labor standards in the Company's grocery and related product distribution
warehouses during fiscal 1998 resulted in a decline in warehouse
efficiency. In response, the Company has implemented an incentive program
for all collective bargaining associates to improve efficiency. While
incentive payments have been made in two warehouses, the ultimate success
of the program has yet to be determined. Under the existing agreement,
labor standards could be reestablished in March of 1999. The Company also
implemented a management incentive plan during the prior fiscal year.
Payment under the plan requires a targeted level of earnings and,
accordingly, amounts have been accrued as of September 12, 1998 that were
not accrued as of September 13, 1997.
Among other items offsetting the increased expenses related to compensation
were reductions in contracted labor and workers compensation costs and
reductions in loss reserves in the insurance segment.
On October 14, 1998, the Company's Board of Directors approved an
initiative to negotiate an agreement with a distribution and logistics
management company to build, own and operate a new multi-commodity
distribution center for the Company and its subsidiaries. The initiative
includes the cessation of operations at the Company's existing distribution
center in Plymouth, Michigan by April 2000 and would result in the
displacement of approximately 300 associates in Plymouth and approximately
100 associates at its Grand Rapids distribution center. Management expects
this initiative to have a positive impact on operating and administrative
expenses as a percentage of net sales, although its evaluation of the total
associated costs has yet to be completed.
The Company has committed to the discontinuance of the "Over-the-Road"
freight department. Year to date revenue associated with this department
approximated $2.5 million, which resulted in a loss of approximately
$300,000 before taxes. Transportation equipment associated with the
department will either be redeployed in the Company's transportation
department or returned to the leasing agent. Other costs associated with
the discontinuance are expected to be insignificant.
INTEREST EXPENSE AND INCOME
Interest expense for the quarter and year to date ended September 12, 1998
was .3% of net sales compared to .4% for the quarter and year to date ended
-14-
September 13, 1997. The decline was primarily attributable to lower
average borrowings during the period due to the sale of retail properties,
lower inventory levels and strong earnings performance. Interest income is
comparable with prior period levels.
LOSS/GAIN ON SALE OF PROPERTY AND EQUIPMENT
During the quarter ended September 12, 1998, the Company experienced losses
of approximately $.7 million on the disposal of certain technology related
equipment in connection with the implementation of a logistics software
package and on the disposal of certain assets associated with the closing
of administrative offices in conjunction with the Company's plan to
centralize existing processes. For the year to date period ended
September 12, 1998, the Company experienced a gain on the sale of property
and equipment approximating $1.2 million reflecting sales of two retail
properties during the first quarter. Management does not anticipate
engaging in significant real estate transactions during the remainder of
the fiscal year.
NET EARNINGS
Net earnings for the quarter and year to date ended September 12, 1998 were
$4.1 million and $9.4 million, respectively, compared to $2.8 million and
$5.6 million, respectively, for the quarter and year to date ended
September 13, 1997. The increase in net earnings is primarily attributed
to improvements in sales and gross profits in the distribution segment.
Net earnings performance in the insurance and real estate and finance
segments were comparable with prior periods.
Year to date basic and diluted net earnings per Class A share were $.83
compared to $.47 for the comparable period in the prior year. Return on
average shareholders' equity was 8.02% for the year to date period ended
September 12, 1998 compared to 5.19% for the year to date period ended
September 13, 1997.
YEAR 2000 READINESS DISCLOSURE
During Fiscal 1997, the Company began assessing the ability of its
computers and other systems to accurately process date and time data in
connection with the Year 2000. As a result of this assessment, the Company
developed a plan that addressed internally developed systems, purchased
systems, imbedded processors and third party risks. The strategy for
internally developed systems is to replace or convert non-compliant systems
or eliminate unnecessary systems. The Company is using both internal
resources as well as contracted consultants to assist in accomplishing this
task. The Company also has completed an inventory of its purchased systems
and imbedded processors, has contacted or attempted to contact the related
-15-
vendors or manufacturers to determine their Year 2000 compliance, and is in
the process of replacing, converting or eliminating the purchased systems
that the Company has been informed or otherwise has determined are not Year
2000 compliant. The Company currently estimates that a small number of
systems will have to change as a result of imbedded processors. Finally,
the Company is mailing inquiries to customers, suppliers and financial
institutions relative to their Year 2000 compliance status. Also, a
significant effort is underway to communicate Year 2000 issues to the
Company's customer base by conducting seminars and distributing tool kits
and other similar materials.
The Company estimates that it already has replaced or converted
approximately 75% to 85% of its non-compliant systems and that all major
systems will be Year 2000 compliant by April 1999. The Company has spent
approximately $3.8 million during the past two fiscal years and expects to
incur an additional $2.2 million to address the Year 2000 issues. The
Company has delayed other non-critical development and support initiatives
as a result of these expenditures. The Company believes that due to its
current efforts and future plans, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems. If
such modifications and conversions to the Company's systems are not
completed timely, however, or if the Company's customers, suppliers or
financial institutions should fail to adequately modify their computer
systems, the Year 2000 problem could have a material adverse impact on the
Company's ability to order and distribute product as well as operate its
insurance and real estate and finance businesses. Management believes the
Company's greatest exposure exists with its customers and suppliers and
their inability to process business transactions should they fail to
adequately address the Year 2000 problem. As the Company completes its
Year 2000 compliance efforts, the Company intends to develop contingency
plans to further address adverse consequences potentially arising from the
Year 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flows from operating
activities and borrowings under a bank credit agreement. At September 12,
1998, the Company had approximately $80.1 million in additional bank
borrowings available. Also, the Company is permitted to sell unsecured
notes under a note offering with a total principal amount of $100,000,000.
As of September 12, 1998, approximately $14.2 million of these notes were
outstanding and the Company had approximately $48.7 million in availability
under this offering. Management believes that cash flows from operating
activities and the Company's ability to issue notes and to borrow under the
bank credit agreement will be adequate for the Company's operating,
investing and financing activities.
-16-
Net cash provided by operating activities was approximately $49.9 million
for the year to date period ended September 12, 1998, compared to $16.3
million for the year to date period ended September 13, 1997. The increase
in net cash flows from operating activities is primarily the result of
stronger earnings, a reduction in inventories and an increase in accounts
payable and other accrued expenses due primarily to the timing of certain
promotional activities. Management expects that the Company will increase
its cigarette inventories by the Company's fiscal year end. Additionally,
cash flows from operations in the Company's third quarter is typically
impacted by higher inventory levels associated with seasonal holiday
buying.
Net cash used in investing activities was approximately $.8 million for the
year to date period ended September 12, 1998 compared to approximately $6.4
million for the year to date period ended September 13, 1997. Capital
expenditures for software development have declined significantly.
Management expects that total capital expenditures will continue to show
declines from prior year levels. Additionally, the Company's collections of
amounts due on notes receivable from retail customers has increased due to
early payments by customers. Finally, two retail properties were sold
during the year to date period ended September 12, 1998, which resulted in
approximately $3.9 million in proceeds.
Net cash used in financing activities of approximately $51.8 million is
primarily attributable to reductions in amounts borrowed under the
Company's bank credit agreement due to strong operating cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP is
effective for the Company on March 28, 1999, however, early adoption is
permitted. The SOP will require the capitalization of certain costs
incurred after the date of adoption in connection with developing or
obtaining software for internal use. This SOP will be adopted on a
prospective basis and its effect on future operations has not been
determined.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The matters discussed in this report include forward-looking statements
that describe the Company's plans, strategies, objectives, goals,
expectations or projections. These forward-looking statements are
identifiable by words or phrases indicating that the Company or management
"expects," "anticipates," "projects," "plans" or "believes" that a
-17-
particular occurrence "may result" or "will likely result" or that a
particular event "may occur" or "will likely occur" in the future, or
similarly stated expectations. In addition to other risks and
uncertainties described in connection with the forward-looking statements
contained in this Report on Form 10-Q, there are many important factors
that could cause actual results to be materially different from the
Company's current expectations.
Anticipated future sales are subject to competitive pressures from many
sources. The Company's Distribution segment competes with numerous
warehouse discount stores, supermarkets, pharmacies and product
manufacturers. The Company's Insurance segment is subject to intense
competition from numerous insurance agents and insurance companies,
especially in the property and casualty insurance markets. Competitive
pressures in these and other business segments may result in unexpected
reductions in sales volumes, product prices or service fees.
Operating and administrative expenses may be adversely affected by
unexpected costs associated with, among other factors: costs associated
with BASE (Business Automation Support Environment); computer and other
system modifications and upgrades to address Year 2000 issues;
unanticipated labor shortages, stoppages or disputes; business
acquisitions, including the Company's acquisition of retail stores;
business divestitures; the defense, settlement or adverse judgments in
connection with current or future legal or administrative proceedings; the
cessation of operations at the Company's existing distribution center in
Plymouth, Michigan; the discontinuance of the "Over-the-Road" freight
department; and the adoption of SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The Company's
future interest expense and income also may differ from current
expectations, depending upon: the amount of additional borrowings necessary
in connection with retail store acquisitions; cigarette inventory levels;
retail property sales; the volume of notes receivable; and the amount of
fees received on delinquent accounts, among other factors.
The foregoing is intended to provide meaningful cautionary statements for
purposes of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The foregoing should not be construed as an exhaustive
list of all economic, competitive, governmental and technological factors
that could adversely affect the Company's expected consolidated financial
position, results of operations or liquidity. The Company disclaims any
obligation to update its forward-looking statements to reflect subsequent
events or circumstances.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of certain litigation, reference is made to
"Contingencies" in the Notes to Consolidated Financial Statements included
in Part I, Item 1, of this report, which is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on September 24, 1998
at which the shareholders elected the following directors:
VOTES FOR VOTES WITHHELD
--------- --------------
Roger L. Boyd 6,499,310 89,827
John S. Carton 6,499,310 89,827
Ronald A. DeYoung 6,499,310 89,827
Donald J. Koop 6,499,310 89,827
The directors whose terms continued after the meeting are as follows:
Russell H. VanGilder, Jr., James G. Buick, Glen A. Catt, Parker T.
Feldpausch, Martin P. Hill, Dan R. Prevo and James B. Meyer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS: The following documents are filed as exhibits to
this report on Form 10-Q:
EXHIBIT NUMBER DOCUMENT
-------------- --------
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. No reports on Form 8-K have been filed
during the period for which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: October 27, 1998 SPARTAN STORES, INC.
(Registrant)
By /S/CHARLES B. FOSNAUGH
Charles B. Fosnaugh
Vice President Development
(Principal Financial Officer
and duly authorized signatory for
Registrant)
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EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT
- -------------- --------
27 Financial Data Schedule